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As Economic Doubts Grow, China Rolls Out a New ‘Keqiang Index’

China’s Premier Li Keqiang attends the 4th Meeting of Heads of Government of China and Central and Eastern European Countries, in Suzhou, Jiangsu province, China, November 24, 2015.

Reuters

Tired of the old Keqiang Index? Get ready for the new one.

Questions over China’s official growth figures have created a cottage industry in private indices attempting to better measure change in the world’s second-largest economy. Many are loosely based on comments attributed to Li Keqiang, then-party secretary of northeastern Liaoning province and now Chinese premier, reported in 2010 in a leaked U.S. diplomatic cable.

Over dinner with the U.S. ambassador, according to the cable, Mr. Li said China’s growth figures were largely “man-made” and unreliable, before adding that electricity consumption, rail cargo volume and new loans provided a more accurate picture of economic growth.

Last week, China’s State Council, the nation’s cabinet, suggested in an online post that it was time for a new Keqiang index.The new measure should be focused on employment, personal income and environmental improvement to better reflect Beijing’s growing focus on innovation and quality of life, said the post, which cited stories by China Business News and the Economist.

The State Council has a point. Most Keqiang indices focus on old economic drivers like manufacturing, transportation and lending despite the growing role services and consumption are playing in the economy. Services accounted for 48% of gross domestic product in 2014, compared with 41% for manufacturing, while consumption last year was 51% of GDP, up from 49% in 2011. In China, consumption includes government spending.

But some question the timing.

“It makes sense; they need to start thinking about the economy differently now that there’s more services growth. And if they want to move more toward consumption, income growth is a good way to track it,” said Conference Board economist Andrew Polk.

“But I think they’re also trying to take the focus away from areas of the economy that are having difficulty. It’s very convenient coming out with the flip side when the traditional Li Keqiang index is not performing well,” he added.

A key concern with any new Keqiang index is that areas such as environmental compliance and quality of life aren’t always easily quantifiable or necessarily helpful in tracking growth – in any country.

“To find an alternate measure is like the holy grail,” said Hong Kong University of Science and Technology professor Li Xi.

Even those that are quantifiable may have problems. Services activity tends to be difficult to track given its diffuse nature. And China’s official urban unemployment rate has stayed remarkably constant — between 4% and 4.3% annually for the past 10 years – making it of questionable value in tracking the real economy, some said.

“The official unemployment rate is pretty useless. It’s far too stable and it’s certain that unemployment has varied much more than that in the past decade,” said Julian Evans-Pritchard, economist with Capital Economics, whose China Activity Proxy suggests China’s current growth is around 4.3%. “With unemployment, there’s an issue of social stability, and they have an incentive that it doesn’t appear to rise too much,” he added.

China’s central bank said in September that Beijing would adopt a more rigorous International Monetary Fund statistical standard in a bid to improve the transparency, credibility and global comparability of its data.

China’s State Council, statistics bureau and the National Development and Reform Commission, China’s top planning body didn’t immediately respond to faxed requests for comment.

In particular, economists criticize China’s use of the deflator — a number employed to account for price changes – which they say is applied inconsistently and includes imports and therefore may overstate growth.

In September, the NDRC said on its website that doubts over growth figures were “too arbitrary” and not based on “strict and sound research.”

This followed a more wonky press conference in July in which China’s statistical agency defended its methodology and use of the deflator.

“Unfortunately, by doing so, they made us feel more convinced,” said Mr. Evans-Pritchard. “The more they do this, the more they work themselves into a hole, the more difficult it becomes to admit and the wider the gap between what they say growth is and what it is,” he added.

Suggestions that the old Keqiang index is outdated and should be replaced by a new one also leave the impression that China’s economy has already shifted to new growth drivers, some economists said. This may gloss over the difficulties, potential unemployment and required political will to restructure an economy with too many factories and too many unsold apartments, they add.

“You can’t just say everyone is going to be an entrepreneur or innovator,” said Mr. Polk. “You can’t just wave a magic wand. You need to continue tracking the old economy because this transition is not going to happen overnight.”